INVESTING -- A Long-Term Tech Bull
BusinessWeek Online
Personal Investing: INVESTING Q&A
Wednesday March 6, 10:05 am Eastern Time
As tech demand improves and companies start seeing greater profits, the market should gain ground in the latter half of the year, says Matthew O. Fitzmaurice, CEO and chief investment officer of Amerindo Investment Advisors. ``The trend will be higher toward the end of the year, and 2003 and beyond will be the largest opportunity we've ever seen in a technology cycle,'' he says.
In addition to focusing on the e-commerce, software, and telecom, Fitzmaurice is following trends in storage networking. He says he tries to balance his portfolio between shares of recognizable names with great fundamentals, such as eBay (NasdaqNM:EBAY - news) and Expedia (NasdaqNM:EXPE - news), and underexposed tech companies with great potential, such as Sycamore (NasdaqNM:SCMR - news) and Loudcloud (NasdaqNM:LDCL - news). At times, Amerindo funds also take stakes in emerging-technology companies that are close to going public.
Fitzmaurice was the guest in a Feb. 28 chat presented by BusinessWeek Online on America Online. He responded to questions from the audience and from BW Online's Karyn McCormack. Edited excerpts follow. A full transcript is available from BW Online on AOL at keyword: BW Talk.
Q: The markets have been struggling for direction, and technology stocks have been getting hit hard. What's your market outlook?
A: Our view is that we should see choppy, flat-to-up market action for the balance of the first half, with a bias to the upside in the second half of 2002.
Q: What will send the market higher in the second half?
A: Several things. First, investor sentiment is particularly pessimistic currently. Second, company expectations have been dampened in a very large way. And finally, we are starting to see improvement in end-user demand for two of the three areas of technology where we focus.
Q: Do you think Nasdaq will test its lows of September?
A: Our view is that we will not test those lows. It's principally for the reasons we just stated. Expectations are already low, and we're starting to see pockets of pickup in demand.
Q: What do you think of Qualcomm (QCOM) and Sun Microsystems (SUNW)?
A: The caveat is that Amerindo focuses on next-generation technology and biotech companies. As a general matter, companies like Sun, Qualcomm, Cisco (CSCO), etc., are not the kinds of tech growth companies we focus on. Instead, we would be looking at companies like Expedia, Freemarkets (FMKT), and Siebel (SEBL), which are next-generation tech companies. Having said that, we think over time -- up to the next 18 months -- Sun and Qualcomm are legitimate companies that will have a place in the technology growth world.
Q: Can you give us some of your favorite picks now? Anything you have recently bought?
A: We're trying to balance companies with great fundamentals, which tend to be more expensive -- like eBay, Expedia, and Freemarkets, and also Siebel -- vs. companies whose opportunity we view as enormous and the markets have forgotten, like Sycamore, which currently has a billion dollars in cash and trades at negative enterprise value. So we try to balance the portfolio.
Q: Is eBay still your largest holding? If so, why do you like it so much?
A: eBay is definitely one of our top 10 holdings, maybe in our top five. We like it because the company has a huge, open-ended opportunity with revenue growth approaching 50%. The auto category alone could be huge, with operating margins that approach 70% at maturity.
The first five years at eBay have been about setting the individual marketplaces up. The next five will be about expanding the reach and providing higher services like finance and insurance. Eventually, the company will have global reach. So it's really eBay as the No. 1 500-pound gorilla in an enormous market, with a great business model, great revenue growth, and high margins.
Q: What will the next megatrend or development be?
A: One of the megatrends we've been focusing on for 18 months to two years that's really starting to come to the fore is companies that are in the various areas of storage networking. An example of one we like would be Brocade (BRCD). In addition to that, we've made investments in several very exciting private companies that have next-gen technologies that will be coming to the marketplace soon.
Q: What about fiber optics vs. wireless: Who will be the winners?
A: In the fiber-optics space, we continue to believe as strongly as we did three years ago that the entire telco service provider infrastructure must be rearchitected using fiber and intelligent switches. We were on the cusp of this trend going back into 2000 and 2001. However, with a flood of cheap capital, too many next-gen service providers and system and component companies were created. Cheap capital in the forms of VC and debt created a situation of excess.
We are currently working through this excess of companies. Once it is rationalized, legitimate service provider players will be left standing with skinnied-down debt levels and balance sheets. We expect this will happen toward the end of 2002, and 2003 will be a huge year for service providers to purchase new fiber-optics equipment, which will allow them to bring better, cheaper, higher-margin data services to end users -- and therefore increase the service provider's revenue and earnings. Make no mistake, the remaining service providers will spend enormous sums on next-gen optical systems and components. Companies like Sycamore and ONI Systems (ONIS) will be the beneficiaries.
Secondarily, as it relates to the wireless space, here, too, we saw enormous euphoria and overspending on various wireless strategies. Here again, with the recession, both wireless service providers, who also have big debt levels and need to work them down, and corporate entities, who had planned on wireless strategies that are now faced with decreasing revenues and earnings, pushed out the spending for wireless. However, it's not a matter of if it's going to happen, but more when. It is our view, again, that it will occur in the latter half of 2002 and really ramp up in 2003.
Q: Do you see any companies that are relatively unknown that could be the next Microsoft over the next decade?
A: If the question is, ``Are there companies that are overlooked that will have the opportunities to have an enormous market cap, and be the largest company in their market,'' the answer is yes. The one that springs to mind is Loudcloud. It provides software infrastructure to allow companies to outsource their Internet operation. Customers include News Corp., Nike, and the U.S. government.
The company saw many public market competitors fall by the wayside and declare bankruptcy, such as Exodus. In addition, there were five private companies attempting to compete with Loudcloud, but because they weren't able to get to the public market, they ran out of funding. Loudcloud went public and is fully funded, with $150 million in cash, and its business model never called for it to take on heavy debt.
So, notwithstanding the current economic environment, Loudcloud has been gaining traction in an enormous marketplace. And it appears it will be the last man standing. The company went public in a terrible market and has been relatively overlooked because of the difficult market environment. As a result, it may be considered the baby being thrown out with the bath water, when in fact its market opportunity remains very large. Its tech advantage is increasing, and its competition is falling by the wayside.
Q: Is there a way for individual investors to invest in private companies through Amerindo?
A: Yes. The mutual fund has very recently adopted a policy that allows it to invest up to 20% of the fund's assets in private companies. This is a very recent change, and one we are very excited about. We have always felt at Amerindo that the best way to invest in next-gen tech companies is to find them very early, either at or around their IPO, invest in them then, and grow with them over the next three to seven years. More recently, because of the huge decline in the public market, the private equity market has also decreased dramatically in valuation.
In addition, the terms that one can get in a private equity investment now are substantially better than they were two and three years ago. Because we continue to believe that the Internet will create many great next-generation technology companies and the price terms are so compelling, we decided -- and received board approval -- to place this small number of privates in the mutual funds. So you can participate in these privates through the mutual funds.
Q: There seems to be a tech recession. Can tech spending ever get back to levels of the late '90s?
A: Two things are clear: The euphoria associated with the Internet, and the spending associated with it, were too high and are to be viewed as an aberration in the 2000-to-early-2001 time frame. However, it is anticipated that info-tech spending, notwithstanding that it was disappointing in 2001 and will be flat in 2002, will rise 8% to 9% in 2003, with the overall IT spending as a percentage of revenue of Fortune 500 companies continuing to rise from 3% in 1990 to 5% in 2000 to 7% in 2010. The long-term IT spending trend remains up and to the right.
Q: What do you think of Priceline (PCLN) now?
A: Priceline might be a good example to use to talk about the entire ``price bubble vs. fundamentals'' analysis. No company could have been more loved, then more loathed, than Priceline. They were going to change the world, but later their business model and what they brought to the end user were considered to be valueless. Now, as the dust settles, we find that travel online is one of the best businesses to take advantage of all that the Internet offers.
There are three companies -- Expedia, Priceline, and one other -- that are showing explosive growth with a great business model. We anticipate that this trend will continue into the foreseeable future. We continue to think that, although Priceline will have success, Expedia may be better-positioned as a company that provides more to the end user, and therefore will be more diversified and garner a larger market capitalization. However, Priceline will have its place.
Q: Any last thoughts or words of wisdom to share?
A: Investor sentiment continues to be particularly negative. However, there will come a time where the improvements are so clear that Wall Street and management will have no choice but to conclude that business is getting better. And keep in mind what this will mean for these companies. Inventories are so low, and so are costs, that even small upticks in revenues will create a huge surge in the bottom line.
So we are optimistic as we look out over the next 18 months as to the direction we're heading for next-gen tech and biotech companies, although we believe the market will be choppy. But the trend will be higher toward the end of the year, and 2003 and beyond will be the largest opportunity we've ever seen in a technology cycle.
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